Diamond Foods Shares Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of walnut kingpin Diamond Foods (NAS: DMND) were cracked in trading today, losing as much as 42% after the company updated investors on its investigation into internal accounting practices.

So what: What a mess. For months now, Diamond's board has been digging into the way that the company had accounted for some payments given to walnut growers. In a press release after yesterday's close, the results that the board delivered were not pretty.

Both CEO Michael Mendes and CFO Steven Neil were unceremoniously fired and the board said that the financials for both fiscal 2010 and 2011 would be restated. At issue was a "continuity" payment of $20 million made to growers in 2010 and a "momentum" payment of $60 million made in 2011. The board said that the payments were accounted for in the wrong periods, which could suggest that management was trying to show better earnings growth by shifting around costs.

To put the size of the questioned payments in perspective, Diamond's total net income was $50 million in fiscal 2011 and $26 million in fiscal 2010.

Now what: I'm an investor who's ready to go after beaten-down bargains, but for now I'm still steering clear of Diamond. Thanks to the accounting shenanigans that have gone on, we no longer have much of a picture of what Diamond's business looks like and how well it's actually been growing. At the same time, we're just at the beginning of the potential legal fallout from this debacle. And, of course, the deal the company struck with Procter & Gamble (NYS: PG) to buy the giant's Pringles division looks pretty unlikely at this point since the terms of the deal hinged on Diamond providing accurate financials and keeping senior management in place.

While Diamond's stock has fallen considerably, it's still not at a left-for-dead level that would inspire me to buck the considerable unknowns and jump in.

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At the time thisarticle was published Fool contributorMatt Koppenhefferdoes not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting hisCAPS portfolio, or you can follow Matt on Twitter@KoppTheFoolor onFacebook. The Fool'sdisclosure policyprefers dividends over a sharp stick in the eye.Motley Fool newsletter services have recommended buying shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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